Cambridge International A Level · Economics (9708)

Types of cost, revenue and profit, short-run and long-run production: Practice Questions

2 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Types of cost, revenue and profit, short-run and long-run production.

7 questions26 marksFree, no account

Question 1

1 mark

In the short run, a firm experiences the law of diminishing returns. Which of the following best explains why this occurs?

Question 2

1 mark

A firm operating in an imperfectly competitive market faces a downward-sloping demand curve. If the price elasticity of demand (PED) for its product is equal to 1 (unitary elastic), what is the value of the firm's marginal revenue (\(MR\))?

Question 3

4 marks

Distinguish between the law of diminishing returns and diseconomies of scale by identifying the specific time period (short-run or long-run) in which each concept occurs.

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Question 4

6 marks

A firm's Total Cost (TC) function is represented by \( 4Q^2 + 10Q + 400 \). Calculate the Average Total Cost (ATC) when \( Q = 10 \) and explain, using the relationship between Marginal Cost (MC) and ATC, why the ATC will change if output increases to 11 units.

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Question 5

3 marks

Distinguish between internal economies of scale and external economies of scale by identifying the specific cause of the reduction in average costs for each.

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Question 6

4 marks

(a) Explain the difference between internal economies of scale and external economies of scale. Provide one example for each that might occur in the technology industry.

(b) Describe how the existence of external economies of scale affects the position of a firm's Long-Run Average Cost (LRAC) curve. Contrast this with a movement along the LRAC curve caused by internal economies of scale.

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Question 7

7 marks

(a) Explain the mathematical relationship between Marginal Product (MP) and Marginal Cost (MC) in the short run. Why is the MC curve often described as a 'mirror image' of the MP curve?

(b) A firm experiences a period of increasing returns to a factor followed by diminishing returns. With the aid of a diagram, analyze how this transition affects the slopes of the Total Variable Cost (TVC) and Average Variable Cost (AVC) curves. Identify the point on the diagram where the Law of Diminishing Returns begins to operate.

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